Interest Only Loans See Increase
Following speculation from the Financial Services Authority’s (FSA’s) Mortgage Market Review (MMR) about a complete ban being placed on interest only home owner loans and mortgages, many lenders withdrew the option of an interest only loan for the majority of borrowers, on the grounds of affordability.
But now, as lending criteria begins to relax slightly and lenders are starting to offer loans once more, interest only loans are starting to make a comeback, according to the latest figures from HSBC.
The amount of new loans which were taken out on an interest only basis throughout the course of last year saw an increase of around 4 per cent on the previous year, according to the bank, with around £28 billion worth of new home owner loans being taken on just interest only.
HSBC, whose overall lending on new home owner loans increased by around 7 per cent to £64 billion last year, say that the vast majority of these interest only loans were offset loans taken through First Direct.
Despite this increase in interest only home owner loans, many banks and building societies are still extremely reluctant to offer loans on this basis, unless the borrower has some type of suitable repayment vehicle in place to cover the outstanding loan amount, such as an endowment policy, or an investment ISA.
Home owner loans and mortgages which are taken out on an interest only basis are still considered to be a high risk area of lending for many loan companies, as many see it as a sign that the borrower is struggling to realistically afford the loan repayments.
As a result of this, interest only loans are likely to only continue to account for a small proportion of the home owner loan market in the UK for some foreseeable time to come.
